Repayment
mortgages have one huge advantage over interest-only
or endowment mortgages.
Once
the mortgage term is complete, you are guaranteed
to own your property outright.
There
is NO risk of not being able to pay off the mortgage, as long
as you make all your payments.
Unlike
endowment
mortgages, you do not have to worry about your endowment
insurance policy payout falling short of what you need to pay
off your lump sum.
Unlike
interest-only
mortgages, you do not have to worry about whether the investments
you have planned to pay off the capital
sum will be successful.
Either
of these scenarios can result in you having to sell or remortgage
your home to pay back the capital
on your original mortgage. This simply cannot happen with a
repayment mortgage, as you pay off the capital
sum as you go.
Repayment
Mortgages Make Moving Up More Affordable
Imagine
two people, Mr. Repayment and Mr. Interest-Only. Both bought
identical houses at the same time and for the same price. But
Mr. Repayment chose to take a repayment mortgage, while Mr.
Interest-Only took an interest-only policy.
They
both have the same income, and eight years after buying their
houses, they both want to move to a bigger home.
Question:
Who can afford to spend the most on their new home?
Answer:
Mr. Repayment can.
The
reason for this is that while Mr. Interest-Only has been benefiting
from lower monthly payments on his mortgage, he has not been
reducing the amount he owes at all – he has only been
paying the interest
on it.
Mr.
Repayment, on the other hand, has been steadily reducing his
capital
sum as well as paying interest.
He may have had slightly higher monthly payments each month,
but when he sells, he will be left with a bigger profit than
Mr. Interest-Only because he will owe the building society less
on his current mortgage.
In
the short term – under three years, for example –
you are unlikely to make any significant reductions on the capital
sum of a repayment mortgage. Over longer periods, however, the
benefits of a repayment mortgage can really kick in, making
it more affordable to move to a new home if and when you want
to.
If
the interest
rate goes up, your payments will not go up by as much as they
would with an interest-only mortgage.
The
reason for this is quite simple, really. As we found earlier,
with a repayment mortgage, your monthly payments are only partly
made up of interest–
the other part is a repayment on the capital
sum itself. So
when interest
rates go up, only the interest part of your monthly
payment gets bigger – the other part stays the same, reducing
the size of the increase.
Compare
this to an interest-only
mortgage, where your entire monthly payment is made up of
interest. If your interest rate goes up, your entire monthly
payment will be increased, not just part of it.
This
means that an increase in interest rates increases
the payments on an interest-only mortgage more than it would
on an equivalent repayment mortgage – a big advantage
of repayment mortgages.
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